The viable solution

In a wide-ranging interview, Minister of Investment Mahmoud Mohieddin tells Assem El-Kersh that the only way to end poverty in Egypt is to continue to pursue sustainable growth while ensuring that public spending is directed far more efficiently at those most in need

Mahmoud Mohieddin

"Learning from the Future" is the theme of this year's Davos regional meeting in Egypt. Is it too early to plan for 2025?

No. The future always surprises us no matter how carefully we try to predict it. That is why we cannot stop planning and must constantly draw up alternative scenarios for tomorrow while seeking to improve our prospects through investment today. Where some countries of the Organisation for Economic Cooperation and Development (OECD) are now is where we hope to be in the future. But there are some areas in which we have not made the advances we hoped, notably in developing our infrastructure, the quality of education and investment in health, human capital and the environment. These are areas in which we need to make progress in the coming years.

What is the best case scenario for Egypt's economy?

The only viable scenario is growth, growth and more growth. Dealing with problems such as inflation and the budget deficit cannot distract us from the basic goal of boosting growth rates. In a country like Egypt, where the population grows by 1.9 per cent annually, 20 per cent of people live below the poverty line and official unemployment figures stand at nine per cent, growth is the only solution. We have had three years of sustained growth but the impact is not immediate. We need to engineer yet more growth if we want to see a fairer distribution of wealth.

How do you assess the prospects and challenges Egypt faces?

Opportunities have been opened up that allow us to be more optimistic than was the case just two years ago. Upper Egypt is a good example. Infrastructural development has included upgrading the road networks in Beni Sweif and Fayoum. Natural gas pipelines have been extended to Beni Sweif, Minya and Assiut. The number of companies being set up has risen from 45 a week three years ago to an average of 155 now. When these companies begin recruiting workers it will help with unemployment. The opportunities are there to be grasped though we still face problems with bureaucracy, particularly at a municipal level. We are tackling this by setting up new investment zones and improving our follow up and monitoring techniques. We are also decentralising the decision-making process in a bid to upgrade management practice in state- owned projects. The benefits of these changes should begin to be felt within three years.

How will the faltering international economy, soaring oil prices and global inflation, impact on the Middle East?

I don't think these factors, however they are lumped together, constitute unrelieved bad news. Higher oil prices benefit many of Egypt's neighbours and that allows for opportunities to boost trade and more investments. Of course, inflation is bad for everyone. We are doing our best to bring it down though two thirds of Egypt's current inflation is imported. We are trying to reduce the budget deficit and the problems associated with it and are tightening monetary policy without hampering growth. There remains much that can be done, not least in reducing the spread between deposit and lending rates which can reach four to five per cent in some cases.

Has the falling dollar and incipient recession in the United States hit us ?

Certainly it has not helped in terms of exports and tourism with Europe. But Egypt's economy is more integrated with the rest of the world than ever before. Once, 90 per cent of our total trade was with the US and Europe. Today, while trade relations with both remain important they account for only 67 per cent of overall trade. The same applies to foreign direct investments and sources of capital inflows.

Was the government surprised by the reaction of the public following the announcement of measures to fund the 30 per cent pay rise in the public sector?

The reaction was predictable. Nobody is happy when prices increase. But of the seven measures only one, the increase in the cost of fuel products, could be deemed controversial, and I don't think its eventual impact will be negative. People must realise that there are limits on the ability of the state to sustain subsidies without running an even bigger budget deficit which will force even more complicated counter policies in the future and in the end hit the public harder.

We have been subsidising oil products since the 1970s and people have got used to this. Even those driving big, expensive cars seemed to see nothing wrong in the state subsidising their fuel. There is an issue of fairness here. I don't think that the rest of the measures, even the increase in the duty on tobacco, are unpopular with the majority. The measures we adopted target those who might be classified as middle income and above, not those on very low incomes.

Nor do I think you can reduce the whole package to a single item; the increase in fuel. The economy is much more complicated than it was in the late 70s. Yes, fuel increases will have an impact but you cannot claim a change in one variable is responsible for changes in all other economic variables. Even if you do consider the price of fuel, the crux of all issues, a future government could reduce the price of petrol again. But I would wager that will not happen, or even if it did happen it would not be followed by a reduction in prices.

But what about the seemingly random and immediate increases in prices following the announcement of the measures?

When you review the actual change in prices you will discover that the prices of sugar and other items have remained constant. Yes, transportation tariffs increased but by how much? You need to ask if the increases are bearable. They went up by 10 to 15 per cent in Qalioubiya and other governorates which means people are still paying 50 to 75 piastres. Affordability is an important issue, especially when public transport costs are still fixed. It may not be available for everybody to every destination but it is still there for the majority of the population, and affordable.

There will be price rises and that automatically implies a reallocation of resources on the part of individuals but not to the extent that the poor, the underprivileged, those worthy of subsidy and deserving a 30 per cent increase in their pay will see that increase wiped out.

Could you monitor the market and fix prices for a year?

Freezing prices would be a bad thing for the country even if it is the legal right of the government to do so. It would be the disaster of disasters if it ever happened. You cannot dictate the price of food products. Part of the government's role is to protect markets but not by placing ceilings or caps. We protect the market via consumer protection laws, by providing clearer information on what is happening and by tackling malpractices and manipulation of prices. We can act against anti-competitive pricing. The only way to protect this country and its economy and markets is to respect the rules of the market and regulate them efficiently. If you do anything to restrict market movements a black market will spring up immediately.

Was the negative public reaction just a matter of bad timing of the announcement then? And how do you think it might have impacted on the public's trust in the government?

I don't see the reaction as that bad. It has been received badly in some circles and more positively in others. The rich will have to pay more while those who are classified as low income or poor should, and will, be protected. I think our credibility would be called into question were we to shirk from applying the right measures at the right time. I admit there is a need to convince the public of the necessity of the decisions taken, that they were right, but we can do that in cooperation with the media.

How true are reports that there were disagreements within the cabinet over the pay increase and the ways to cover it?

Discussions involve all sorts of arguments over the means to achieve a given end but once you make the final decision there are no more disagreements. I am not going to share with you the internal debates and discussions that took place in the cabinet while considering how best to fund the 30 per cent increase in salaries. Enough to say that we reviewed alternative scenarios and opted for the most practical, the one that carried the least social costs. We formulated the package and discussed it with parliament as the constitution demands. Some in the media seem to think the government's only concern is to take harsh measures so that it will go down in history as a bold, reforming one. Our aim, though, is to fix the economy and to do so we have had to abandon some populist measures that were set, tuned and anchored in a different time but which in today's world actively debilitate economic performance.

Is it the role of this government to oversee the worst phase of the liberalisation process before bowing out?

No government is there forever. Yet all governments need to leave a mark, some sort of a reference to their time. I won't use the word legacy, because what we are delivering are policies, but you do need to see policies promoting improvements across the economy. What I would say is that there should be better marketing of our policies, more communication, a better understanding. We need to carry the public along with our decisions as much as that is possible. But imagine the tenor of any public debate about an increase of petrol prices? Nobody would agree with you publicly, even if they were convinced that it was a necessary measure. Just think what happened when we debated subsidies in public, when we discussed whether they should be distributed in cash or via cards. It was like talking about an Ahly versus Zamalek football match. No one was ever going to change their minds.

But shouldn't the public have more of a say in determining the direction of their country's economy?

The choice of the regime and the way you manage the economy is not really a huge concern for the ordinary public. They don't really care about the kind of system or its philosophy. You can call it whatever you like. At the end of the day, the man in the street wants a job, to be able to feed his kids, and have faith in a brighter future.

How do you see the result of three years of economic liberalisation?

Our economy today is much more competitive and flexible. It is able to absorb and deal with shocks more than ever before. If we had been exposed to similar shocks three years ago when our growth rate was three per cent, our inflation rate was 14 per cent and the exchange rate was LE7.3 to the dollar, and with an active black market, we would have been in a much more difficult position.

Are we still in a transitional period? And if so, what time scale do you estimate for a complete shift to a free market economy?

In some areas we are still in a transitional period, in others we are where we need to be. To have a per capita income of Malaysia or Korea or Singapore we need to be growing for several more years, and sustain growth at a minimum level of seven per cent. I'm not saying that we need years and years of hard labour to get where we want. The journey should be more enjoyable than that. There will be consolations as people see their incomes increase, have better access to resources, even if it is a long way to go before we achieve the kind of success as, say, Korea. And we still need to get rid of obstacles in our path, the lack of infrastructure in Upper Egypt, a lack of decent education in many districts, lack of healthcare, insufficient access to training. But these things are in essence short-term problems. If there is the will to solve them they can be solved. And there is no point engaging in endless, redundant discussions of whether they are best solved by a state- controlled or a market-controlled economy. We need to check what is happening from communist China to Vietnam, in Russia, in all these one time gurus of socialism, see how they are managing their economies today. Is it state rule or do they rely on market conditions with more and more effective regulations and high quality supervision?

How do you see the social cost of your policies, what some have called the heavy bill of success?

With all policies there are winners and losers and one way or another you have to compensate the losers. Such compensation involves an admission that because of the reform some people lost. That loss could be relative: if you were a protected industry and now you are subject to trade liberalisation as has happened, say, to public sector workers in the textile and garments industry, then there is no denying they are losing because of the trade liberalisation measures of the last 15 years.

In the course of liberalisation some people will be harmed. Income disparities grow and the gap widens between rich and poor. You can not ignore this forever. How can you ease the burden?

Let me try to clarify. In every country, in the short term there will be losers and winners. It is simply human nature that if you are a winner you are going to thank God in silence, and if you are a loser you are going to cry, you will complain to the media and condemn the government. But it is the job of the government to take hard decisions, to choose between different kinds of measures, some of them worse than others. It is also the job of the government to cater for the needs of the poorer or those who were challenged or became underprivileged because of the measures that you have undertaken. That is why there are subsidies and a pay increase of 30 per cent. That is why there is the Social Fund for Development and a safety net that we need to enhance. That is why we emphasise corporate social responsibility and the need to tax the rich and provide revenues to the poor through reallocation. But if we do not take the necessary reform measures we will end up impoverishing the whole of society, as has happened in Egypt before.

But is this message reaching the man in the street ?

The individual is exposed to a host of pressures and nuisances that do not necessarily make him or her happy or feel involved with what is happening. Even if you are doing well, you send your kids to a good school, own a decent car and enjoy a reasonable vacation in a place you own on the north coast, you may feel that somebody got a similar place to yours for a lower price, or in a better location, because he knows an important person. The feeling then is one of unfairness.

How about those who cannot make ends meet and worry day and night about covering their minimum needs?

Twenty per cent of our population is poor. They are unhappy because they are poor. The answer, then, is to help them out of poverty. The answer is not to leave them in poverty and say we will always help you through state subsidies, or through the charity of wealthy individuals. In the end it is more productive to teach these people how to catch fish rather than give them fish.

Terms like rich and poor can be deceptive. How do you define them?

We have discussed the definitions in government many times. I would go for the consensus view embodied in international standards for measuring the goods and services. But more important than semantic squabbles is the need to spend more, and spend more effectively, on providing public services. This week, in my meeting with a group of new ambassadors to Egypt, I was asked what they could do to help promote investment. I asked for help improving social infrastructure. It is on the provision of public services that access to decent health services, good education of all children, depends, without any discrimination between rich and poor. Effective public spending improves the per capita income across society.

As the state has retreated from its welfare role questions have been raised about the commitment of the current "government of businessmen" to social justice...

Business people are Egyptian citizens and like everyone else it is assumed that when they are in government they will avoid any conflict of interest and base their decisions on the greater good.

But how effective are our social safety nets? Are they in place or is everyone being left to fend for themselves?

The state levies taxes and social insurance contribution from its citizens. Unfortunately, we are now paying for decades of mismanagement of the public sector and the masked unemployment it brought with it. Nationalised industries have failed everywhere in the world. We are now trying to improve what is left and have turned an annual loss of LE1.5 billion into an LE4 billion profit, and have reduced public sector debts from LE32 billion to less than LE10 billion.

The social responsibilities of the state are best met by public spending on the poor, not on every body and not through subsidising the petrol and electricity consumed by the rich, often in holiday homes. Why should the state subsidise the bread of those who can afford to pay market prices?

Yet because of panic, a lack of trust and other complicated factors we had the strange situation of people threatening to strike in order to preserve a status quo that is clearly unfair. Some 55 per cent of public spending goes to fund social programmes. Check the budget. The biggest sums go to subsidies, direct and indirect. How can we be more socially considerate?

The public is told to be patient and await the fruits of reform. But when will the trickle down effect begin?

There is nothing automatic about the trickle down. It will not reach each and every Egyptian at the same time and in equal amounts. Alexandria can grow at the rate of 12 per cent per annum while nothing improves in Beni Sweif. For the latter, to mirror Alexandria's success channels between the two should be opened. It will take better roads and better education and, most important, equal opportunity.

What are your aspirations? Where would you like to see Egypt moving?

Egypt's OECD bid means many things to us. It is not just becoming a member of the club, but the hope is that in the foreseeable future per capita income will more than double and growth will be higher and sustainable across all sectors.